Sourcing Outside China: the Pros and the Cons

Sourcing outside China to minimize your supply chain risks? In these uncertain times, as the need for supply chain diversification and efficiency increases, businesses may be wondering sourcing outside of China, to another country will actually lead to lower risk, reduced costs and a well oiled supply chain.

By all accounts, China is the largest manufacturing economy in the world for low-cost goods previously, and more recently, for advanced, high-end products, such as electronics and technological products. In fact, according to a recent report published by the United Nations, China accounted for 28 percent of the global manufacturing output in 2018. When this is coupled with seemingly limitless supply of labor, a modern infrastructure and the region’s rich supply of a wide range of precious resources, it seems as though manufacturing China is a no-brainer.

Sourcing outside China: an important step to minimize supply chain risks

Supply Chain Disruption

But, rising labor costs across most large Chinese cities, increased tariffs and instability within the global market are making manufacturers consider other economies. US President Trump’s 25% tariff on imported Chinese goods, for example, has raised manufacturing costs for American companies to the point where it is prohibitive. This has left them scrambling for alternatives.

But, leaving China is not a step that buyers and procurement managers can take lightly. Moving manufacturing to a new country can be a great way to improve stability, total cost of ownership or quality but it also requires careful planning and consideration. Each country has its own legislative reality and way of doing business, and some regions are just better than others for producing certain products.

That said many emerging economies promise to be the next China– if even a mini version of it. But, they too have their advantages and downsides to consider.

The top alternatives to China currently include Malaysia, Vietnam, India, Bangladesh, Indonesia, and Thailand.

Both Malaysia & Vietnam for, example, has a growing, modern infrastructure, relatively low manufacturing costs, and is close enough to China to benefit from its resources and infrastructure. It also has a high level of industry diversity plus a willingness among factories to work with smaller product runs. Finally, for US companies, shipping lines run frequently, resulting in ease of importation of goods.

But even with all of these qualities, both Malaysia & Vietnam just can’t compete with the size and scope of the Chinese economic juggernaut.

So where does this leave companies looking for a change in their supply chain?

When deciding what road to take, businesses should be aware of the major pros and cons to moving production out of China in the first place.

Why Keep China in the Supply Chain

Even with the above drawbacks, there are still several reasons why companies may choose to stay in China:

  • Taking advantage of the extensive infrastructure. China has been in the manufacturing game for many years now, and they have invested a lot of resources into building up their internal infrastructure. This includes the largest shipping and supplier network in Asia.
  • Access to raw materials. One of the biggest hurdles for businesses wanting to move their manufacturing outside of China is access to necessary raw materials. Few to no countries can compete with China’s resource-rich environment. Plus, with a network of almost 3 million factories operating operating throughout the country, manufacturers can easily get all the material and supplies they need from a nearby factory without having to import it from another country.
  • Cheap labor still exists. It may be harder to find, but it’s possible to keep labor costs low by choosing to work with a factory located in a more rural area in China. However, companies need to be concern if it is too good to be true as there are instances of human rights abuses.
  • A new market opportunity. China isn’t just a manufacturing hub, for some companies it can also be a potential market for their products. With a population of over 1.3 billion people, that’s a lot of potential customers. Breaking in to this market, however, requires the help of a locally-based outsourcing company.

Reasons to Source Outside of China

Here is a rundown of the majors reasons to move manufacturing out of China:

  • Lower production costs. One of the major advantages to working outside of China is that production costs can be dramatically lower– especially when it comes to large production runs. This has a touch of irony since the primary driver to manufacturing in China has always been the ability to tap into an exceptionally large labor-ready force earning below average wages. But labor costs in China have risen dramatically over the past 20 years or so.
  • Fewer regulations. Though the Chinese government has many regulations and incentives in place to help keep local companies competitive, there are a number of strict requirements and limitations for foreign companies doing business there. Many neighboring countries on the other hand, have more favorable business environments for foreign entities.
  • Reduce risk. The on-going trade war between China and the US, and by extension, much of the world, creates a lot of uncertainty about what the future holds for China and its manufacturing industry. Such uncertainty just doesn’t fit in a supply chain that must quickly adapt to changes in demand. Many smaller companies in particular may find that they need a more stable and predictable environment.

The bottom line for companies wishing to move their manufacturing outside of China is that they need to be in touch with their needs and go into the process informed. Alternatives to China are definitely out there, but every company has to decide what makes the most sense for their products and business model.

Source outside of China and diversify your supply chain with Ge-Shen’s engineering & manufacturing capabilities

Ge-Shen has helped many customers from US, China or customers from the rest of the world, diversify their supply chain and establishing manufacturing hubs outside of China. Over the past 2 years, Ge-Shen has built an extensive sourcing strategy to ensure a seamless supply chain for its customers.

With favorable trade relations between China and Malaysia or Vietnam, Ge-Shen deploys a blended sourcing strategy – picking the best manufacturers or suppliers from China, Malaysia & Vietnam for these parts while keeping most other manufacturing in-house or in-country. This has proven to help customers diversify its supply chain and source outside of China quickly.

About Ge-Shen Corporation Berhad

Ge-Shen Corporation Berhad (www.gscorp.com.my) is a contract manufacturer that specializes in plastic injection moulding, sheet metal fabrication and assembly services in 3 locations across South East Asia. GSCORP has years of experience helping product owners bring their ideas to life. Ge-Shen Corporation Berhad is listed on the main market of Bursa Malaysia Securities Berhad.


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